The bank's non-performing assets consist of about 50%income-producing properties and 50% construction lending, says CFOTim Doyle. "The commercial stuff I'm concerned about, but we knowwe'll be OK because we loan in markets where there's high demand inreal estate," Doyle says, adding that the bulk of the bank'scommercial loans are in the Western US, including San Francisco,Los Angeles and San Diego.

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While there are "People sitting on the sideline," Doyle says, "Idon't feel that we're going to have a lot of credit lossesassociated with income-producing properties. Our feeling is thatincome properties are situated in markets where there's going to bedemand for those properties."

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As for residential related construction lending—in residential,the bank focuses on land development loans, track residentialdevelopment, condo conversion and ground-up condo project loans—itmay take time to recover from ongoing losses, but Doyle seeslong-term stability.

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"If the economy continues to plod along at the current pace,we'll be able to work though our construction loan portfolio," hesays, adding, "But let's be honest, there's a lot of blood in thewater. Obviously, the markets are so filled with fear that it'salmost irrational. We have exposure, but it's nowhere near what ourpeers have with respect to construction lending."

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The bank reported net interest income before provision for loanlosses increased 13.5% to $24.8 million for the quarter comparedwith $21.8 million for the same period last year. The increase wasprimarily due to an increase in interest earned on investmentsecurities held-to-maturity, as well as a decline in average costof funds, as deposits have repriced to current market interestrates, the company said.

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During the quarters ended June 30, 2008 and 2007, the averagebalance of the company's investment securities held-to-maturity was$567.4 million and $181.6 million, respectively. At June 30, 2008,investment securities held-to-maturity totaled $914.4 millioncompared with $159 million at December 31, 2007. These increaseswere primarily related to the purchase of approximately $784.6million of AAA-rated corporate sponsored collateralized mortgageobligations during the current year, which are secured by Alt Afirst lien residential mortgage loans, predominantly all of whichcarry fixed interest rates, the company said.These CMOs wereacquired at an average cost of 88% of their current par value, thecompany said.

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"The banking industry today is suffering a severe crisis," Doylesays. "It's obvious that not only is the financial industry havingits issues right now but the general economic conditions haveslowed and deteriorated. And as much as we're not happy, becuaseprofits are off, we are cautiously optimistic."

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